Prioritizing which U.S. bills to pay would be 'chaos': Lew

WASHINGTON (Reuters) - The Obama administration said on Thursday that a looming U.S. default would hit everyone from Social Security pensioners to bondholders and urged Congress to raise the cap on government borrowing to avoid a crisis.

Appearing before lawmakers, U.S. Treasury Secretary Jack Lew tried to shoot down the notion that Washington could prioritize between its many payment obligations.

He warned lawmakers that later this month the government might miss payments on pensions and health care for the elderly. It also must make payments to creditors.

"I don't believe there is a way to pick and choose on a broad basis," Lew told a Senate hearing.

While missing non-debt payments could over time push the economy into recession, a missed debt payment could trigger an even more profound financial crisis.

Washington takes in about 70 cents in taxes for every dollar it spends, so it must borrow to pay its bills. If Congress fails to raise a $16.7 trillion cap on government borrowing soon, the Treasury will not have enough money to cover the nation's obligations.

While there were signs that a debt ceiling deal could be closer, failure to raise the current limit would force the government to stop adding to the national debt by October 17.

Lew said that even if President Obama authorized the Treasury to try to prioritize payments, there was no way the payment system would operate smoothly. "It would be chaos."

Many analysts are convinced the administration would at least try to keep investors whole, and Republican lawmakers have proposed plans that would force the administration to do so.

"The only appropriate thing to do is plan for contingencies," said Pat Toomey, a Republican senator from Pennsylvania.

Toomey pressed Lew to divulge any plans the administration might have for insuring that creditors will get paid, but Lew said this could be impossible.

"Anyone who thinks that it can be done just doesn't know the architecture of our multiple payment systems," Lew said. "They were designed properly to pay our bills; they were not designed to not pay our bills."

Lew also said there were complicated legal issues regarding prioritization of interest and principal on debt.

Gridlock in Washington was already hurting the U.S. economy, he said.

The country's political dysfunction has already led the government to partially shut down, which is sucking money out of the economy by delaying payments to many federal workers.

"We now face a manufactured political crisis that is beginning to deliver an unnecessary blow to our economy," Lew said, adding that uncertainty over the possibility of default was already weighing on financial markets.

(Reporting by Jason Lange; Additional reporting by Susan Heavey; Editing by James Dalgleish and Leslie Gevirtz)